Collaboration is essential for financing the energy transition

Blog series on Bridging the energy transition gaps |
#2 Funding

The European Green Deal and regulations such as the Climate Act and CSRD are intended to accelerate the energy transition. The goal is to realize global climate neutrality by 2050. To achieve this, several major gaps still need to be bridged. One of these is the financing of the energy transition. Collaboration between the financial sector, market players, and the government is essential to close the financing gap. A generic funding approach will not benefit everyone; it is time for tailored solutions, say PwC experts Niels Muller and Glenn van den Broek.

Actually, the energy transition financing gap is a paradox. It is not a case of money not being available; there is plenty of money globally. The problem is that money is not finding its way to projects that facilitate the energy transition. The size of the available "wall of capital" or "wall of debt" is impressive. Just look at the demand from Dutch pension funds for more projects in the energy transition. The major challenge is bringing together different sources of funding - equity, debt, and subsidies - with the right conditions to create a valid business case.

Energy transition currently means investing in uncertainty

The main reason for the lack of investments in the energy transition is clear: uncertainty. Companies want to transition to sustainable practices, but they face obstacles such as high initial costs, long payback periods, technological uncertainty, and uncertainty about (future) laws and regulations. The costs of setting up a new factory can amount to billions. Who would want to invest in this if it is uncertain whether it will pay off, as the market for the end product does not yet exist?

Many companies cannot take this risk. As long as the market demand does not pick up, suppliers and tech companies are also stuck in the same waiting room. Technological advancements also need to be financed. At the same time, new technology is crucial for sustainability projects, such as that new factory. From constructors to consumers - we cannot do without them. 

The production of green hydrogen is such an example. Battolyser, one of the speakers at the World Energy Congress 2024 in Rotterdam, has developed a smart electrolyzer that combines hydrogen production with a battery. This product can provide an important solution for the infrastructure of the energy transition. Battolyser is ready to go, but is waiting for orders from the industry to start producing green hydrogen. However, no one dares to invest in the production of green hydrogen because it is uncertain at what price it will be sold in the future.

However, there are more obstacles, such as the overloaded electricity network. Our large industrial customers can often only reduce their emissions by electrifying their production processes. But if there is no prospect of a grid connection, the bank won't participate either. In other words, to make the energy transition financially viable, all the puzzle pieces need to fall into place. Then we can actively use the "wall of capital" for the energy transition. 

Long-term vision with stability of laws and regulations

All parties are therefore dependent on one another. But where can the breakthrough be found? The government plays a key role in this. Where the market is (too) uncertain and companies cannot take the risk, the government can step in with regulation or a price incentive. An example of regulation is the closure of coal-fired power plants, which accelerated the adoption of alternative solutions. Conversely, the government can give a push by reducing the costs of sustainable investments.

Take the Dutch offshore wind market, for example. With enormous subsidies, the government once reduced the costs. This made the return on investment transparent and also made the risk in the market acceptable. It created a 'pipeline' and allowed the market to operate independently. Another example is the green steel production in Sweden that is now taking off. The government has actively supported that as well. 

The government is happy to take on that role, but is looking for a way to do so. There are many subsidies available, but they don't always fit the project or come at the right stage. A generic bucket of money doesn't help everyone. In addition, the variability of politics is a risk. Take the example of coal-fired power plants in the Netherlands. Eight years ago, new coal-fired power plants were put into use, and three years later a law was passed to close them. A long-term vision is essential so that companies that invest can rely on stable laws and regulations.

Dialogue within the energy ecosystem

While government regulation and price incentives are crucial to facilitate the financing of the energy transition, it is not solely the government's responsibility. Companies themselves need to make specific requests for tailored solutions that better align with their needs. The government often does not know what is happening on the ground. We need to look at the issues bottom up, so that we can understand each other and make joint tailored agreements.

Another important element in bridging the financing gap is transparent reporting. More and more companies are required to report on non-financial information according to the Corporate Sustainability Reporting Directive (CSRD). The CSRD requirement is often seen as a regulatory burden, but it can also be part of the solution. It makes companies more transparent about their sustainability goals and requires them to engage in dialogue with all stakeholders, including the government. This dialogue between companies, the financial sector, and the government is essential for building business cases.

In addition, the certainty of off-take contracts by partners also plays an important role. This means that it is predetermined that a party, for example, will purchase green hydrogen as soon as it becomes available. Only then does the company make the investment to start producing green hydrogen. With such a guarantee from the market, a strong business case for investors, and a tailor-made solution from the government, there is considerably less uncertainty surrounding sustainability investments. If we manage to put these puzzle pieces together, the financing of the energy transition can take off.

This is the second blog in a series about the 'gaps' that need to be bridged for a successful energy transition. The first blog was about energy transportation and the desired infrastructure.